Satish Chandra, C.J.
1. The assessee was a partnership firm. Its partners had a capital account as well as a current account with the firm. The firm paid interest to the partners on the balances in the capital account. The firm also charged interest from the partners on the debit balances of their current account.
2. For the assessment years 1970-71, 1972-73 and 1973-74, the ITO disallowed the entire amount of interest paid by the firm to its partners in respect of the capital account under Section 40(b) of the I.T. Act. The assessee appealed. The AAC held that it was the net amount paid by the firm to the partner, after adjusting the interest paid by the partner to the firm, that alone could be disallowed under Section 40(b). He granted relief to the partners accordingly.
3. The revenue went up to the Tribunal, which affirmed the view taken by the AAC. It relied on a decision of this court in Sri Ram Mahadeo Prasad v. CIT : 24ITR176(All) .
4. At the instance of the Commissioner of Income-tax, the Tribunal has referred the following question of law for our opinion :
'Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that only the net amount of interest paid to a partner after deducting the interest paid by him could be added to the firm's income under Section 40(b) of the Income-tax Act, 1961 '
5. In CIT v. London Machinery Co. (Income Tax Reference No. 608 of 1977, decided on 26th October : 117ITR111(All) , a Bench of this court has held that payment of interest to a partner on amounts brought by him from his HUF or from his individual funds is in either case payment of interest to the partner and both these kinds of payments are within the purview of Section 40(b) and hence are inadmissible as deduction, but in view of the decision of this court in Sri Ram Mahadeo Prasad the net amount paid by the firm to its partners alone is disallowable.
6. In view of these decisions, we answer the question referred to us in the affirmative, in favour of the assessee and against the department. The assessee will be entitled to costs, which are assessed at Rs. 200.